Lloyds Banking Group PLC (LSE:LLOY) shares are tipped to rise almost 70% as analysts at Credit Suisse reckon the upside from higher interest rates is being underappreciated by the market.
The British bank’s equity offers attractive relative and absolute value, according to Credit Suisse analyst Omar Keenan, who in a note says the market is still ‘looking for comfort’ over the 2023/24 outlook.
Keenan, meanwhile, highlights that higher interest rates spell bigger profits for the bank.
“Pricing in a Bank of England rate of 2.25% leads us to upgrade our net interest income (NII) estimates by 2-7% for 2022-24,” Keenan said.
The analyst added: “Our statutory profits are 13-17% ahead of consensus and we expect Lloyds will deliver a >12% return on tangible equity (ROTE) much sooner than the 2026 target (this year).
“We think this is underappreciated by the market, which has focused on the conservatively set 2024 target of >10% issued earlier this year, and hence why Lloyds strategically remains our top pick in the UK banks space and a wider sector top pick.”
“We expect management will eventually mark the strategic plan to market, but are likely to hold off until the full-year results early in 2023 to establish more clarity on the economic and rates outlook.”
The Swiss bank rates Lloyds as ‘outperform’ with a 71p price target, compared to today’s price of around 42p.
With an eye on the Bank of England, Credit Suisse ‘would not be surprised to see faster and higher rate hikes’ which it reckons would see Lloyds hit net interest margins (NIM) closer to 2.88% (last seen in 2019, before the Covid pandemic).
“Lloyds trades on PTBV (price to tangible book value) 2022 0.73x which we think is attractive for our view that Lloyds will sustainably deliver a capital adjusted ROTE above 12% for 2022-24 under our current macro assumptions. The next catalysts are 2Q results on 27 July and incoming economic data,” Keenan said.
“Key downside risks are weaker economic outcomes and lower rates, and a tougher competitive environment than we anticipate.”